Corporate Business Finance deals with the financial decisions of the corporate sector. It also designs the tools necessary to make such decisions. The basic objective of corporate finance is to maximize the corporation’s return to capital subject to a wide spectrum of risks.
Corporate Business Finance deals with the following issues as detailed under the following heads:
Capital Investment Decisions: These are corporate Business finance decisions relating to the long term. This involves deciding on financing a project with equity or debt. The goal of the corporate sector is to maximize return on investing in projects which fulfill the following criterion:
Net Present Value > 0.
This Net Present Value (NPV) is calculated by using a suitable discount rate. Capital investment decision has three elements,
1. Investment Decision:
It is the responsibility of the management to allocate the scarce resources among competing opportunities. This process is known as capital budgeting. For making such investment decisions the value of each project must be estimated taking into consideration the project size, timing and predictability of future cash flows etc. Hence investment decision comprises:
Project Valuation: For evaluating a project, the size and timing of future cash flow for each project is calculated. The future cash flows are then discounted to obtain the Present Value. The Net Present Value is sum of the present values. Apart from NPV other selection criteria are in vogue like the Internal Rate of Return (IRR), Modified IRR, Equivalent annuity, capital efficiency and Rate of Return (ROR).
Valuing Flexibility: Flexibility is valued using the Decision Analysis and Real Option.
2. The Dividend Decision:
In corporate business finance the management has to decide the form in which dividends are to be given to the shareholders. Investing in additional projects, reinvesting in existing operations or by returning simply free cash, may generate dividends to shareholders.
Working Capital Management: This type of corporate business finance is used the management of the current assets of the company. It also deals with short term financing such that the cash flows and return are acceptable. Working capital management deals with the following issues:
1. Cash Management:
Cash management involves determination of cash balance that would be adequate to meet the day-to-day cash requirements. Cash management reduces the cash holding costs.
2. Inventory Management:
Inventory management is identifying the level of inventory that would promote uninterrupted production. The level of inventory should, at the same time, reduce the investment in raw materials and reordering costs and in the process enhances cash flow.
3. Debtors Management:
this involves adoption of an appropriate credit policy that would attract customers.
4. Short Term Financing:
the inventory is financed by credit granted by the supplier or a bank loan
Financial Risk Management: Financial Risk Management is vital for Corporate Business Finance. It basically highlights the risks that are to be hedged by the use of different financial instruments. The financial instruments are changes in the commodity prices, interest rates, foreign exchange rates and stock prices. Derivatives like options, future contracts, forward contracts and swaps are used as instruments of financial risk management.
The word corporate finance has different connotations in different parts of the world. In the United States the word is used to describe the above whereas in United Kingdom and Commonwealth Countries the terms corporate finance and corporate financier is associated with issues like investment banking.
For more details on corporate business finance sites like kpmg.com, yesbank.in, corporatefinancemag.com may be viewed.